Hi there, Nicholas Campion here from 1st Formations, and welcome to another episode
of Whiteboard Thursday, where we provide advice on a wide range of business and company matters. If
you find this video useful and you enjoy it, please give us a like and share it with your friends and
colleagues. But for now, let's get started. Today, I want to discuss the subject of converting from
an LLP or a limited liability partnership to a limited company, and the benefits of doing so.
Converting from an LLP to a limited company offers significant benefits to certain businesses.
Indeed, an increasing number of firms in the professional services sector, and this includes
people like lawyers, accountants, architects, and medical practitioners, are moving away from the
traditionally preferred partnership structure towards the limited company model. Before we
take a look at the benefits of converting to a limited company, let's first take a look at the
evolution of partnership structures in the UK. Many businesses that traditionally operated as general
partnerships, and some of which did so for hundreds of years, decided to adopt the LLP structure following
the introduction of The Limited Liability Partnerships Act 2000, which combines some of
the benefits of incorporation with the important aspects of the partnership model. Several of the
major accountancy practices, and a significant number of law firms, took that leap to limited
liability partnership status. The most obvious reason to convert from a general partnership
to an LLP is to benefit from the protection of limited liability. The traditional partnership
structure does not provide any protection from bad business debt and other liabilities.
Members of an LLP on the other hand, well, they are safeguarded from business liabilities in the same
way as company shareholders. Furthermore, a limited liability partnership is a separate legal entity,
and this means that an LLP can trade or purchase property and obtain finance in its own name.
The legal personality makes it also easier to structure the business and
gain investment; however, some of the features of the traditional partnership are still retained
within the LLP model, including individual taxation of members, and greater flexibility regarding the
internal organisation of the business. Nowadays, many professional businesses operating as LLPs
are taking things a step further and converting to limited companies, to enjoy the advantages
this structure has to offer. So, just what are the benefits of converting from an LLP to a limited
company? Without doubt, the driving force behind converting from an LLP to a limited company is
taxation, and in particular, a company's ability to retain profits in the business and pay the
company owners dividends. So let's look at that in more detail. Limited companies can choose to retain
profits in the business, rather than pay money out via salaries or dividends. Any money plowed back
into the business is only subject to Corporation Tax, which has a lower rate of Income Tax.
LLPs cannot retain surplus income, so all money has to be paid out to the members, which will incur
Income Tax on all those earnings. Unlike LLP members, who need to pay the full rate of Income
Tax on their earnings, company owners can choose to pay themselves via dividends - and the highest
rate of tax on dividends is lower than the highest band of Income Tax. This means it is often more tax
efficient to draw a combination of dividends and a salary, taking into account the tax-free
allowances and so forth. However, taxation is only one of the advantages of a limited company that
it has over an LLP structure. So let's take a look at some of the other reasons why you might wish
to convert that LLP into a limited company. The first of which is sole ownership. Companies can be
owned by just one person. For example, someone can take over a business, whereas LLPs always need to
maintain a minimum of two members, or 'partners', as they're called. If at any point there are
less than two members, for instance, if one of the partners passes away, the LLP will be
automatically reverted to a sole trader status, and the protection of limited liability will be lost.
Then we have structural simplicity. Limited companies are generally set up and governed
in line with the Model articles of association. Meanwhile, LLPs are required to create their own
LLP agreements, and these may be may need to be amended to accommodate changes to operational
matters, which can be cumbersome. Next, we have limited liability. Although LLPs and limited
companies both enjoy limited liability, there are potentially more risks for members of an LLP if it
becomes insolvent. You see, there are these so-called 'callback provisions' that were
introduced by the addition of section 214a of The Limited Liability Partnerships Regulations 2001,
which means that the members can be pursued for debts of the LLP in certain instances. Continuing
on, we have expansion. Takeovers and acquisitions are generally more straightforward for
limited companies in comparison to LLPs. In general terms, you cannot buy an LLP in the
same way that you can acquire a limited company, which would be done through purchasing the shares.
The acquisition of an LLP usually involves purchasing the goodwill and the assets of
the partnership, which often involves further complications, such as transferring the existing
clients to the purchasing entity. Flexibility is the seventh overall point, although this is
not a reason to convert an LLP to a limited company,. But it should be noted that limited
companies can be just as flexible in their ownership structure as an LLP, and this is predominantly
due to their ability to introduce what are called multiple share classes. Next up we have investment.
It is possible to purchase shares in a company without becoming a director, which often makes it
more attractive for outside investors. In contrast, investors in an LLP generally become members,
which potentially entails more responsibility. It is normally more straightforward to invest and
sell shares in a limited company in comparison to investing in an LLP. And finally, stock market
listing. Since LLPs do not have shares, they are unable to obtain external investment
by listing on a stock exchange. Private limited companies are also unable to exchange their
shares publicly, but it is possible to convert that private company into a public company,
also known as a PLC. So those are some of the key benefits of converting an LLP to a limited company.
Now, let's take a quick look at how to actually do it. There is no formal procedure that enables
an LLP to convert to a limited company, as the structures are so fundamentally different. Instead,
it involves a process of transferring the business from the old entity to the new one. There are a few
steps to this which we'll go over briefly now. But before starting, as a sort of a pre-conversion step,
you may want to consider changing your LLP name if you are seeking to use the same name for your
new limited company. It doesn't really matter what you choose in terms of your name here -
a placeholder name is good enough. Doing this frees up the name for registration with your new company.
So, Number 1 - Register a limited company at Companies House. This can be done either
directly, or through an agent like 1st Formations. Number 2 - Transfer any assets and liabilities
from the LLP to the limited company. If there are contracts in which your LLP is party to,
these will need to be novated across as well. Number 3 - The individual LLP members should
enter into director service agreements with the new limited company. And then finally, Number 4 -
the original LLP should be dissolved at Companies House. And just as an important little
side note, it is worth remembering that taxes may be payable with respect to the transfer
of the assets from the LLP to the limited company. And there you have it. Today, we have covered the
evolution of the partnership structure in the UK, why so many businesses are choosing to convert
from an LLP to a limited company, and finally how to make the change in four simple steps.
If you have any questions, please leave them in the comments section below, and in the meantime, be sure
to subscribe to our channel to get more advice on limited companies, reporting requirements, and tax
obligations. We're always happy to hear from you, and we cannot wait to help. Until next time, cheerio.